Are P2P investors better off selling bad loans or relying on recovery?
LENDY is reportedly in talks with distressed debt investors to sell some of its defaulted loans so investors can get repaid. How common is this approach or should it be considered as another risk of peer-to-peer lending?
P2P property platform Lendy has been under pressure from investors amid high levels of arrears and the possibility of legal action from a borrower.
Separately to the proposed litigation, the Financial Times has reported that the property lending platform is in talks with distressed debt investors about selling off some of its loans, while Lendy has told Peer2Peer Finance News that it has had “exploratory discussions” that might allow lenders in a small number of loans to exit if they wish to.
This would involve an external investor such as a distressed debt fund refinancing the loan for the borrower, with the proceeds going to lenders on the platform.
“Helping the borrower to refinance is typically a less contentious, timely and more cost-effective method by which lenders can be repaid,” Lendy said in a statement.
“This can be an effective solution for the borrower.
“Lendy continues to lend, service and recover loans. We are executing according to our business plan and are confident in the service we are providing to lenders and borrowers.”
So how common is this approach?
Selling and intervening on loans is believed to be common in both the banking and P2P space, particularly in small business and consumer lending.
In recent months, Huddle has purchased and refinanced Collateral loans, while last year RateSetter took a stake in its wholesale lending partners to avoid use of its provision fund, while letting investors exit loans early with no charge.
However, Lendy’s situation has raised questions about the need to use distressed debt investors when a P2P lender already has a property as security.
Industry sources have also questioned the market for non-performing loans, warning a big discount would be required for investors.
“We have not considered any such scenario and it is unlikely that we would unless the potential buyer would acquire the loans at little or no discount to face value,” said Filip Karadaghi, chief executive of P2P property lender LandlordInvest.
“However, this is unlikely and any loan sale would likely be subject to significant discount.
“Selling loans to a third party may also be considered if the seller believes that they do not have sufficient capabilities to manage the loans or believe that the third party has better capabilities to do so.
“Any motive for selling loans should be driven by lenders’ best interest.”
Read more: Lendy continues hiring spree
Other property lenders such as Wellesley have underlined the importance of having a capable team in place.
“We have an in-house team of property experts who manage our 26 current developments on a day to day basis,” a spokesperson said.
“With our very few non-performing loans our in-house team would step in and manage the development process, so we can build out the project to secure our returns.”
Neil Faulkner, founder of P2P analysis firm 4th Way, said Lendy should not need to sell loans to distressed debt investors.
“Selling distressed debts is something that might happen in some P2P consumer lending and perhaps even some unsecured small business lending, since that is very common practice in banking for equivalent loans, where bad-debt recovery chances can be very low,” he said.
“It is certainly not common in the kind of lending that Lendy does, it is supposed to be doing secured lending with a maximum loan-to-value of 75 per cent.”
Faulkner said recovery should be made through legal means, involving court orders to take property into possession and authorising the sale, with the proceeds going to pay off the lenders.
“If Lendy’s property valuations, borrower checks and initial legal paperwork were well carried out in the first place, I wonder why the idea of selling to distressed-debt investors is even crossing their minds,” he added.
Lendy has said it is investing in its recoveries, but the question for investors may eventually be, would they rather get something back by selling off loans sooner or risk waiting to see how much more can be recouped if the security can be sold later?